Contributions to this article were provided by Keith Pajonas and Amy Gennarini of Ernst & Young.

Trading has become increasingly computerized since 1998, when the SEC authorized the creation of Electronic Communication Networks (ECNs), and trading activity has shifted from traditional exchanges to over-the-counter markets that provide quick, efficient and low-cost trading. As trades have moved away from the traditional market centers and volume has increased to record levels, regulators have sought ways to protect the markets, individual investors and the economy as a whole from manipulation, insider trading and other illicit activities. With increased regulatory focus on protecting securities market participants, trade reporting and trade surveillance are key to providing transparency, efficiency and oversight for today's trading environment.

By capturing and analyzing customer-initiated and proprietary trading activities, regulatory organizations such as the National Association of Securities Dealers (NASD) and the SEC identify and act on irregularities in market activities. In addition, as the markets, related technologies and trading strategies evolve, new reporting requirements are introduced and revised, creating additional complexity for broker-dealers' operations, risk management and compliance personnel.

Sell-side and buy-side firms, exchanges, and ECNs are required to collect, analyze and report more information in a timelier manner than ever before. Regulators now are using automated surveillance tools, also known as "sweeps," to detect issues, which often result in compliance investigations. The data provided by firms, exchanges and ECNs is used as the basis for regulatory inquiries and to challenge trading firms' responses to these inquiries.

The number of liquidity venues and strategies for routing orders, however, has amplified the complexity of securities markets and made data collection and analysis more challenging. Algorithmic trading systems, for example, can "slice" large block orders into a number of smaller trades and route them to multiple execution venues over the course of hours, days or even weeks. In these situations, reassembling the order trail for regulatory reporting purposes can be daunting.